Question 1

Public television periodically runs pledge drives to raise money. Only a small percentage of the people who benefit from public television are willing to pay. What do economists call the people who do not pay?

Accepted Answer

A)  Free riders 
B)  The excludable 
C)  Adverse selectors 
D)  Thieves

Question 2

Refer to the graph shown. If the marginal cost external to the trade associated with the use of gasoline is $0.10 per gallon, the point on the graph corresponding to the efficient quantity and price is:

Accepted Answer

A)  G. 
B)  H. 
C)  K. 
D)  L.

Question 3

The existence of negative externalities:

Accepted Answer

A)  prevents the market from working efficiently. 
B)  prevents government from intervening in the marketplace. 
C)  causes the market to work more effectively. 
D)  necessarily means that government must intervene in the marketplace.

Question 4

A policy is considered optimal if it:

Accepted Answer

A)  is supported by a majority of voters. 
B)  equates total costs with total benefits. 
C)  equates marginal costs with marginal benefits. 
D)  forces people to conserve on scarce resources.

Question 5

A good that if supplied to one person is supplied to all and whose consumption by one individual does not prevent its consumption by another individual is known as:

Accepted Answer

A)  a private good. 
B)  a public good. 
C)  an external good. 
D)  an internal good.

Question 6

Which of the following is an example of screening?

Accepted Answer

A)  Selling pollution permits to polluters to induce the lowest-cost pollution reducers to cut back on pollution 
B)  Reducing pollution to the point at which the marginal cost of the pollution equals the marginal benefit 
C)  A car buyer asking the seller if the car is a lemon 
D)  An employer requiring job applicants to provide references

Question 7

With regard to a public good provided by the government:

Accepted Answer

A)  individuals reveal their demand when they buy the good. 
B)  a free rider problem is unlikely. 
C)  individuals have an incentive to conceal their willingness to buy the good if they will not be taxed. 
D)  individuals have an incentive to exaggerate their willingness to buy the good if they will not be taxed.

Question 8

Based on economic theory, most economists believe market incentive plans are:

Accepted Answer

A)  equitable. 
B)  efficient. 
C)  inefficient. 
D)  unfair.

Question 9

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Suppose once vaccinated, a person cannot catch a cold or give a cold to someone else. At the competitively determined output level, the marginal social benefit will be:

Accepted Answer

A)  equal to P0. 
B)  less than P0. 
C)  greater than or less than P0 depending on the income elasticity of demand and the effectiveness of the vaccine. 
D)  greater than P0.

Question 10

Which of the following is not an example of an externality?

Accepted Answer

A)  Carbon dioxide from energy generation that adds to the worldwide long-term greenhouse effect. 
B)  Heat from a factory that makes the neighboring tomato patches more productive. 
C)  A defective part that causes an automobile to break down three months after purchase. 
D)  Acidic by-products of fossil fuel combustion that produce acid rain.

Question 11

An efficient policy to reduce pollution would reduce pollution to the point where:

Accepted Answer

A)  the marginal costs of reducing pollution equal the marginal benefits of reducing pollution. 
B)  it is eliminated. 
C)  the marginal costs of reducing pollution are greater than the marginal benefits of reducing pollution. 
D)  the marginal costs of reducing pollution are less than the marginal benefits of reducing pollution.

Question 12

Which policy is likely to be the most efficient in dealing with automobile emission pollution?

Accepted Answer

A)  A mandatory requirement to reduce pollution 
B)  Voluntary emission control guidelines 
C)  Subsidizing research and development for alternative forms of transportation 
D)  An emission tax

Question 13

If the marginal benefit of one more unit of a public good is $500 for Sam and $800 for Alex, the social benefit of one more unit of a public good is:

Accepted Answer

A)  $500 since the benefit will go to the person who values it least. 
B)  $800 since the benefit will go to the person who values it most. 
C)  $1,300 since the benefit of one more unit goes to both individuals. 
D)  more than $1,300 since the benefits to society exceed the sum of individual benefits.

Question 14

Refer to the graph shown. The free market equilibrium in the graph is at a price and quantity of:

Accepted Answer

A)  $5.00 and 2,600 units. 
B)  $3.50 and 2,000 units. 
C)  $2.50 and 2,600 units. 
D)  $3.50 and 3,100 units.

Question 15

A strategy that achieves a goal at the lowest cost in total resources without consideration of who pays those costs is:

Accepted Answer

A)  efficient. 
B)  inefficient. 
C)  impossible. 
D)  always the most profitable to the firm.

Question 16

Refer to the graph shown, which shows the demand and supply for a new vaccine against the common cold. Once vaccinated, a person cannot catch a cold or give a cold to someone else. The socially efficient level of output is:

Accepted Answer

A)  less than Q0. 
B)  greater than or less than Q0 depending on the income elasticity of demand and the effectiveness of the vaccine. 
C)  greater than Q0. 
D)  equal to Q0.

Question 17

Economists generally call the effect of an agreement on others that is not taken into account by the parties making the agreement:

Accepted Answer

A)  excess burden. 
B)  welfare loss. 
C)  Pareto optimality. 
D)  an externality.

Question 18

When you purchase and eat a hamburger, no one else can eat the same hamburger. When you download a file on the Internet, the file is still available for others to download. Economists explain this difference between hamburgers and computer files by saying that the hamburger is:

Accepted Answer

A)  excludable whereas the computer file is not. 
B)  nonexcludable whereas the computer file is not. 
C)  rival in consumption whereas the computer file is not. 
D)  nonrival in consumption whereas the computer file is not.

Question 19

Adverse selection problems can occur when buyers and sellers have different amounts of information about a good for sale.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following methods of reducing the amount of trash society generates is most likely to be efficient?

Accepted Answer

A)  A mandatory recycling program 
B)  A completely voluntary recycling program 
C)  A "trash tax" 
D)  Landfills and incinerators

Exam 8: Market Failure Versus Government Failure